Pakistan’s Islamic Banking Industry is gradually increasing its footprint across the country with increasing its share in all areas of the banking industry. It also left behind the conventional banking when it comes to profitability especially during challenging times for the banking industry.
According to the State Bank of Pakistan (SBP), Islamic Banking Industry (IBI) recorded a profit growth of Rs. 8.8 billion in the first half of 2017 as compared to Rs. 6.1 billion, showing an outstanding growth of 44 percent year-on-year or Rs. 2.7 billion additional in overall profits.
The growth in the profitability of the Islamic Banking Industry is mainly due to the increasing acceptance of the public towards Sharia-based financing. Besides, a significant number of customers of various sectors are shifting towards IBI from interest-based banking for their financial needs.
On the other hand, the conventional banks profit in the first half of 2017 reached Rs. 81.1 billion as compared with Rs.87.7 billion registered in the same period of 2016, depicting a loss of Rs 6.6 billion or 8 percent decline in profitability.
Conventional banks are facing a challenge of low interest rates which have squeezed their margins especially in the calendar year of 2017. This was due to the fact that the policy rates were at a record low of 5.75 percent for the past one year.
The overall banking industry profit declined to Rs. 89.9 billion compared to Rs. 93.7 billion.
Islamic Banking Industry Vs Conventional Banking
Although, the size of IBI is not very significant from conventional banking but its present growth is impressive in all quarters, showing a sound future of the industry in the years to come.
IBI industry gained the market shares of assets and deposits in overall banking industry at 11.6 percent and 13.7 percent, respectively by end June, 2017.
The IBI industry currently consists of 5 full-fledged Islamic Banks, along with 16 windows of Islamic Banking of conventional banks.
The IBI industry is new or young compared to the conventional banking industry. It picked up gradually from 2001 when compared with conventional banking sector, which is as old as the country with 29 banking companies operating.
Out of 29 banks, 16 are operating their Islamic Banking Windows with a considerably limited scope of work when compared with their conventional business and operations.
Meezan Bank and BankIslami are the two banks which have acquired conventional banks in the past such as HSBC Pakistan/ Oman and KASB Bank. Besides, MCB Islamic Bank was separately set up by its parent MCB Bank.
This trend shows that the transformation of banking industry is taking place. Sharia based financing is replacing the interest-based mode gradually along with its new and unexplored targeted market. Hence, IBI is persistently showing a growth in profit compared with the conventional banks facing negative growth in their profitability.